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Pricing Strategies and Determination
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  1. Pricing Strategies and Determination chapter 14 Harcourt, Inc.

  2. Objectives • Explain pricing factors • Compare and contrast cost-based pricing methods • Identify strategic concerns important in pricing decisions Dr. Rosenbloom

  3. Objectives • Evaluate reasons why base prices change over time • Understand new technology implications for pricing behavior, especially price customization Dr. Rosenbloom

  4. What is Price? • Price is the sacrifice that one party pays another to receive something in exchange • For our case, price is a monetary value charged by an organization for the sales of its products Dr. Rosenbloom

  5. Pricing Fairfield Inns The Martin Agency Dr. Rosenbloom

  6. Pricing Alamo Car Rental Hal Riney and Partners Dr. Rosenbloom

  7. Determining the Base Price • Cost-Plus Pricing • Easiest, Often misleading • A simple allocation of fixed and variable costs • Standard mark-up - a standard profit margin • Target return pricing - a standard amount of profit per item • Ignores demand (price sensitivity) and fails to account for competition Dr. Rosenbloom

  8. Determining the Base Price • Demand Pricing • Based on the elasticity of demand • Higher prices are favored with inelastic • Price increases offset volume losses • Lower prices are favored with elastic • Volume increases offset price reductions • Consumers are indifferent with unitary demand • Breakeven analysis • Demand schedules Dr. Rosenbloom

  9. Determining the Base Price • Demand Pricing • Profit-Maximization • Calculate the profit at each price point on a demand curve and choose the highest • In other words, which price produces the highest total contribution • Verified by observing marginal revenue and cost figures Dr. Rosenbloom

  10. Determining the Base Price • Demand Pricing • Where does demand information come from? • Analytic modeling • Experiments • Customer surveys • Managerial judgement Dr. Rosenbloom

  11. Determining the Base Price Strategic Pricing Concerns Ethical Concerns Legal Concerns Low cost focus Differentiation focus price unique Competitive Strategy Positioning Continuum Dr. Rosenbloom

  12. Determining the Base Price Strategic Pricing Concerns Ethical Concerns Legal Concerns Low cost focus Differentiation focus price unique Dr. Rosenbloom Competitive Strategy Positioning Continuum

  13. Determining the Base Price Strategic Pricing Concerns Ethical Concerns Legal Concerns Low cost focus Differentiation focus price unique Dr. Rosenbloom Competitive Strategy Positioning Continuum

  14. Determining the Base Price Strategic Pricing Concerns Ethical Concerns Legal Concerns • Objectives • Goal-setting/Objective-setting • Pricing to achieve a target ROI • Pricing to stabilize price and margin • Pricing to reach a target market share • Pricing to meet or prevent competition • Pricing for profit maximization • Pricing for survival Dr. Rosenbloom

  15. Determining the Base Price Strategic Pricing Concerns Ethical Concerns Legal Concerns Penetration Pricing Strategy • New product pricing • Skimming Vs. Penetration Skimming Pricing Strategy Decline Maturity Growth Introduction Dr. Rosenbloom

  16. Determining the Base Price Legal Concerns Ethical Concerns Strategic Pricing Concerns • High initial price for quick ROI • Inelastic demand • Price insensitivity by the market Penetration Pricing Strategy Skimming Pricing Strategy Decline Maturity Growth Introduction Dr. Rosenbloom

  17. Determining the Base Price Legal Concerns Ethical Concerns Strategic Pricing Concerns • Low initial price with elastic demand • Volume for lower production costs • Imminent competition Skimming Pricing Strategy Penetration Pricing Strategy Decline Maturity Growth Introduction Dr. Rosenbloom

  18. Determining the Base Price Strategic Pricing Concerns Ethical Concerns Legal Concerns • Price-Quality judgements • Customers uncertain about brand quality prior to purchase look to price • Customers look to price in high risk purchases Dr. Rosenbloom

  19. Determining the Base Price Strategic Pricing Concerns Ethical Concerns Legal Concerns • Price Fixing • Violation of Sherman Anti-Trust Act • Conspiring to restrain trade Dr. Rosenbloom

  20. Determining the Base Price Strategic Pricing Concerns Ethical Concerns Legal Concerns • Price Discrimination • Violation of Robinson-Patman Act • Illegal only when business to business • Exception for cost justification • Exception for competitor price matching • Exception for no apparent harm to competition Dr. Rosenbloom

  21. Determining the Base Price Strategic Pricing Concerns Ethical Concerns Legal Concerns • Resale Price Maintenance • When a manufacturer and retailer agree on a minimum price to be charged to consumers at retail • Manufacturers can set suggested prices (MSRP) • Legal to stop selling to retailers who ignore MSRP Dr. Rosenbloom

  22. Determining the Base Price Strategic Pricing Concerns Ethical Concerns Legal Concerns • Predatory Pricing • Aggressive pricing to drive out newer, smaller rivals • After removal of rival, prices are raised again Dr. Rosenbloom

  23. Determining the Base Price Strategic Pricing Concerns Ethical Concerns Legal Concerns • Exaggerated Comparative Price Advertising • Using comparison prices of dubious validity • Product introduced at artificially high prices for a short time then dropped to a new low long-term price Dr. Rosenbloom

  24. Determining the Base Price Strategic Pricing Concerns Ethical Concerns Legal Concerns • Price gouging laws • ATM fee practices • Raising prices for necessities in disaster areas Dr. Rosenbloom

  25. Adjustments to Base Prices • Reasons base prices change over time: • Variation in objectives over product life cycle • Introductory low prices, higher decline prices • Competitive price moves • Competitive forces dictate modification of pricing • Rubbermaid, the U.S. Steel Industry Dr. Rosenbloom

  26. Price Flexing Discounts/Allowances • Reasons base prices change over time: • Price Flexing - Discounts/Allowances To Trade To Consumer Trade-in Allowances Functional Or Trade Cash Discounts Seasonal Rebates Quantity Cash Sales Promotion Dr. Rosenbloom

  27. Price Flexing Discounts/Allowances To Consumer Trade-in Allowances • Used to encourage consumers to upgrade to newer or more expensive products Cash Discounts Rebates Dr. Rosenbloom

  28. Price Flexing Discounts/Allowances To Consumer Trade-in Allowances • Seasonal or age-based discounts used to encourage purchases Cash Discounts Rebates Dr. Rosenbloom

  29. Price Flexing Discounts/Allowances To Consumer Trade-in Allowances • After the purchase payment made to the consumer by the producer Cash Discounts Rebates Dr. Rosenbloom

  30. Price Flexing Discounts/Allowances To Trade Functional Or Trade • Compensate the trade for functions performed: • Buying & Selling • Transportation • Storage • Financing • Risk-taking • Providing Information • Standardizing & Grading Seasonal Quantity Cash Sales Promotion Dr. Rosenbloom

  31. Price Flexing Discounts/Allowances To Trade Functional Or Trade • Permits seasonal marketers to maintain steady production and to sustain operations in out-of-season lulls Seasonal Quantity Cash Sales Promotion Dr. Rosenbloom

  32. Price Flexing Discounts/Allowances To Trade Functional Or Trade Seasonal Quantity Price Cash Spring Summer Fall Winter Sales Promotion Dr. Rosenbloom

  33. Price Flexing Discounts/Allowances To Trade Functional Or Trade • Induce larger-quantity purchases and to reward customers for making fewer purchases but purchasing in larger quantities Seasonal Quantity Cash Sales Promotion Dr. Rosenbloom

  34. Price Flexing Discounts/Allowances To Trade Functional Or Trade • Encourage prompt payment from customers. Invoice includes payment terms and period of time that the cash discount is available Seasonal Quantity Cash Sales Promotion Dr. Rosenbloom

  35. Two percent off the total invoice price if paid within 10 days of the invoice date. Otherwise the total invoice price is due in 30 days Price Flexing Discounts/Allowances To Trade Functional Or Trade Seasonal Quantity Cash Sales Promotion 2/10, Net 30 Dr. Rosenbloom

  36. Price Flexing Discounts/Allowances To Trade Functional Or Trade • Used by producers to encourage greater purchases or used to induce retailers to provide shelf or display space Seasonal Quantity Cash Sales Promotion Dr. Rosenbloom

  37. Price Flexing Discounts/Allowances To Trade Functional Or Trade Off-Invoice Allowances Seasonal Quantity Bill-Back Allowances Cash Sales Promotion Stocking Allowances Dr. Rosenbloom

  38. Other Forms of Price Flexing • Price shading • Salesperson reduces base price because of the need to secure a large/important client • Price customizing • New technology allows for transaction-by-transaction customization Dr. Rosenbloom

  39. Other Forms of Price Flexing • Price promotion • Sales, incentive pricing • Retailers began forward-buying or diverting product • Every Day Low Pricing (EDLP) is reducing the use of price promotion • Couponing • Free-standing inserts (in newspapers) • Point of purchase Dr. Rosenbloom

  40. Other Forms of Price Flexing • Pricing for different segments • Geographic segments • Different prices in different zones • Usage segments • Different prices for high volume users • Demographic segments • Different prices for students, children, etc. • Time segments • On- and off-season rates Dr. Rosenbloom

  41. Geographic Pricing Policies FOB Pricing Uniform Delivered Pricing Zone Pricing Basing-Point Pricing Dr. Rosenbloom

  42. Geographic Pricing Policies Basing-Point Pricing FOB Pricing Uniform Delivered Pricing Zone Pricing • Using freight absorption pricing (FOB - Free On Board) the seller pays or absorbs the transportation charges Dr. Rosenbloom

  43. Geographic Pricing Policies Basing-Point Pricing FOB Pricing Uniform Delivered Pricing Zone Pricing • Using zone pricing all consumers in the same zone pay the same transportation charge Dr. Rosenbloom

  44. Geographic Pricing Policies Basing-Point Pricing FOB Pricing Uniform Delivered Pricing Zone Pricing • Using basing-point pricing, all freight costs are priced as if they originated from the same basing point Dr. Rosenbloom

  45. Geographic Pricing Policies Basing-Point Pricing FOB Pricing Uniform Delivered Pricing Zone Pricing • Using uniform delivered pricing all consumers pay the same transportation charges (average shipping expense to all customers) Dr. Rosenbloom

  46. Pricing Policies PrestigePricing Loss-LeaderPricing Odd-Even Pricing Product Line Pricing Dr. Rosenbloom

  47. Pricing Policies PrestigePricing Loss-LeaderPricing Odd-Even Pricing Product Line Pricing • Pricing at relatively high levels so as to convey an image of high quality or exclusivity Dr. Rosenbloom

  48. Pricing Policies PrestigePricing Loss-LeaderPricing Odd-Even Pricing Product Line Pricing • Pricing policy which offers products at prices below or near cost to attract consumers from competitors’ stores Dr. Rosenbloom

  49. Pricing Policies PrestigePricing Loss-LeaderPricing Odd-Even Pricing Product Line Pricing • Price lining is producing or marketing multiple products at different price points • Bundling is marketing two or more products in a single package for a special price Dr. Rosenbloom

  50. Pricing Policies PrestigePricing Loss-LeaderPricing Odd-Even Pricing Product Line Pricing • Odd pricing refers to a price ending with an odd number just under a round number • Even pricing is used to convey high quality Dr. Rosenbloom